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[Markets] Global Shipping Rates Collapse As Trade War Spreads

When President Donald Trump fired the first shot of his trade war cannon at China, the market for international shipping rates spiked higher in April through July amid a jump in demand for hauling of bulk commodities that are essential in powering the Asian country's economy, as traders sought to front-run the implementation of tariffs.

Fast forward several months, with the Trump administration on the verge of slapping even more tariffs on Chinese goods worth $200 billion, and the uncertainties around global trade appear to have finally collapsed some shipping rates.

BIMCO's chief shipping analyst Peter Sand said, “85.3% of Chinese seaborne imports from the US and 58.5% of US seaborne imports from China could become affected by the trade war, if the US and China implement tariffs on a further USD 200 and USD 60 billion worth of goods respectively." And with no demand to pull forward from the future left, Bloomberg reports that demand for the transportation of iron ore and coal on 1,000-foot Capesize vessels has collapsed by 39% since reaching a 2018 peak in early August.

"Some of the weakness we have seen in dry bulk freight rates can to some extent be attributed to growing uncertainty around the trade war," said Sand, who provides industry trends for more than 2,000 ship owners and operators.

"It is an increasing worry that we hear amongst our members."

Shipping analysts say freight costs offer insights into turning points of the global economy and trade growth. That was the basis behind our late August post "Latest Freight Data Confirms Alarming Slowdown In Global Trade" because a normal environment, increased shipping volumes of iron ore to China's steel mills are a sign that the country's construction industry is humming along. Coal is also used to monitor power generation in the region.

However, things have reversed recently, and capesize day rates dropped 3.9% to $16,559 a day on Wednesday, according to data from the Baltic Exchange. Last month, the prices stood at $27,283 on Aug. 06. Fourth-quarter forward freight agreements declined to $23,750, having been at $26,600 on Aug. 21, data from Clarkson Securities show.

At the same time, the popular Baltic Dry Index - a more comprehensive measure of commodity transportation costs - sank to 1,411 points, its lowest since late June.

Adding to the confusion, Trump said last week that he has lined up an additional $267 billion of Chinese products to tax “on short notice if I want.” That is on top of the already proposed $200 billion in tariffs that could severely damage US consumers.

For the first time in the ongoing trade war, the latest tit-for-tat round has seen China unable to respond proportionately to the $200 billion. And since China imports much less than it exports to the US, if the trade war expands Beijing will have to look at alternative ways for its retaliatory measures.

According to Hellenic Shipping News, China is expected to unleash new "weapons" in the trade battle including targeting US consumer products (Apple) or hitting US investments in China.

Whatever format the next round of the trade war takes, the impact on the global shipping industry will be promptly realized, as uncertainty is about to create a global growth shock that could reprice many assets around the world.

Last week, Bloomberg highlighted that the world trade monitor compiled by the CPB Netherlands Bureau for Economic Policy Analysis showed the rolling three-month trade volumes are not only in decline but have entered into negative territory, an ominous harbinger of economic trouble.

As Bloomberg notes, "the drop is particularly striking given that commodities, one of the largest and most volatile subsets of globally traded goods, have been doing quite well – the CPB’s indexes of fuels and non-fuel commodities both reached the highest levels since 2014 in May."

Instead, confirming the ominous recent developments in Brazil, where a clustering of supply-chain linked problems has resulted in a near paralysis in the country's shipping industry, Bloomberg notes that "the weakness is coming not from materials but from manufactured goods, as global supply chains seize up."

With the CPB index printing negative throughout the second quarter of the year, that echoes the numerous reports of a slowdown in the US. Manufactures “reported higher prices and supply disruptions that they attributed to the new trade policies,” according to the Federal Reserve’s July Beige Book, in addition to “higher input prices and shrinking margins.”

There are strong indications that the trade war - as it progresses into the fourth quarter and beyond - is starting to leave noticeable and severe consequences on the international shipping market that could result in a global growth shock. With that in mind, the dangers of the next US recession could soon be realized as early as late 2019/20. As for who gets the blame, it seems the Trump administration could be the scapegoat.

Published:9/13/2018 8:56:16 PM
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